Hold VST Industries Ltd For Target Rs.3850 - ICICI Direct
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Volumes recover partly; focus on high priced brands
About the stock VST Industries (VST) is among the oldest cigarette company in India, involved in manufacturing and marketing of cigarettes and also trading unmanufactured tobacco. Incorporated in 1930, it is an associate undertaking of British American Tobacco (BAT), the global leader in cigarettes.
* VST has two cigarettes manufacturing facilities in Hyderabad, AP. It has five major brands, including, ‘Total’, ‘Charms’, ‘Moment’, ‘Special’, and ‘Edition’. It has a direct distribution reach of over 1.1 million retail outlets
Q1FY22 Results: VST reported strong cigarette volume recovery in Q1FY22.
* Sales were up 12.1% YoY; cigarette volumes grew 35%
* EBITDA was at | 92 crore, down 7.4% YoY, with margins at 33.4%
* Consequent PAT was at | 70.4 crore (down 7% YoY)
What should investors do?
VST Industries’ share price has underperformed the market with 70% return in the last five years (from | 2000 in July 2016 to | 3476 in July 2021). The pandemic has severely impacted the cigarettes industry.
* We roll over FY24 numbers estimating a complete recovery in cigarettes business in FY23-24
* We continue to maintain our HOLD rating on the stock
Target Price and Valuation: We value the stock at | 3850, valuing the business at 15x FY24 earnings
Key triggers for future price performance:
* With Covid recovery & vaccination drive, mobility is expected to increase by H2FY22
* High priced brands’ (‘Total’ & ‘Edition’) volume contribution to increase in future, which would lead to favourable product mix & margin improvement
* Duties & taxes on cigarettes are expected to remain stable given increasing prevalence of illicit & contraband cigarettes
* We expect dividend payout to increase to ~70% by FY23, which would translate into dividend yield of ~5% at the current price
Alternate Stock Idea: We like Zydus Wellness in our FMCG coverage
* It is growing at a steady pace in nascent categories with a strong presence in health, nutrition space & margin expansion possibilities
Trading at significant discount to FMCG peers. BUY with TP of | 2,800
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